Delays may put oil production in big hole after 2016

By Collin Eaton, Houston Chronicle

December 4, 2015
Updated: December 4, 2015 10:42pm

Photo: Associated Press File Photo

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All told, the industry has scrapped projects worth about $125 billion in annual capital spending plans over the next five years, assuming just half of the projects would have been sanctioned if the oil market hadn’t crashed over the last 18 months. That leaves oil companies several years behind on building the production equipment and infrastructure they eventually will need to bring their buried oil to market. less

All told, the industry has scrapped projects worth about $125 billion in annual capital spending plans over the next five years, assuming just half of the projects would have been sanctioned if the oil market ... more

Photo: Associated Press File Photo

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An oil sands facility operates near Fort McMurray, Alberta, Canada. The International Energy Agency estimates it costs $95 to $114 a barrel to pull crude from Canadian oil sands upgraded with high-tech extraction methods. less

An oil sands facility operates near Fort McMurray, Alberta, Canada. The International Energy Agency estimates it costs $95 to $114 a barrel to pull crude from Canadian oil sands upgraded with high-tech ... more

Photo: Associated Press File Photo

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Camels are seen beyond an oil well near the Khurais oil facility. Saudi Arabia can pump oil for $9 to $14 a barrel. It has produced a record amount of crude this year.

Camels are seen beyond an oil well near the Khurais oil facility. Saudi Arabia can pump oil for $9 to $14 a barrel. It has produced a record amount of crude this year.

Photo: Associated Press File Photo

Delays may put oil production in big hole after 2016

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Blindsided by a brutal downturn, oil companies have scuttled plans for scores of costly energy projects in an industrywide retreat that could wipe out 19 million barrels from the world’s daily output over the next few years, a new report says.

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Tudor, Pickering, Holt & Co. said last week that the companies have canceled or delayed final investment decisions on about 150 projects tied to 125 billion barrels of oil equivalent, which could stay underground for several years longer than expected amid the steep drop in crude prices.

“By not sanctioning projects today, you’re putting a hole in production in 2017, 2018 and 2019 — potentially a big hole,” David Pursell, head of macro research at the Houston energy investment bank, said in an interview.

Analysts had expected U.S. oil production, which is down by 500,000 barrels a day from its peak in April, to drop more rapidly than it has this year and help crude prices recover from multiyear lows.

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But one of the lessons of the yearlong price slump has been that if crude prices stay low long enough, production of crude beyond the United States and OPEC also will have to decline to put oil supply and demand back in balance.

Outside the Organization of Petroleum Exporting Countries — the 13-member cartel that produces some of the world’s lowest-cost oil — all kinds of crude production are at risk when companies are forced to weigh investment returns against scenarios in which prices remain depressed for years.

The U.S. Energy Information Administration believes the harvest of liquid fuels in non-OPEC countries including Russia and the United States will register a decline for the fourth quarter of 2015, the first absolute drop since mid-2011. Non-OPEC production growth is expected to sink by 520,000 barrels a day in the first quarter of 2016, which the Energy Department agency projects will be its slowest quarterly growth for the year.

“It’s really about how long are we are down at these (oil price) levels, because the longer you’re down here, every month or two it just puts more stress on the balance sheets,” said Pearce Hammond, an analyst at Simmons & Company International.

Tudor Pickering projects about 3 million barrels of deferred daily production will be in Canadian oil sands projects, among the industry’s most expensive prospects because the viscous crude is too thick to move easily underground. Another 5 million barrels likely will be delayed in war-torn Iraq and Kurdistan.

Elsewhere, in Mozambique, Australia and Canada, progress on liquefied natural gas plants has been slow. Tudor Pickering expects producers will defer 20 projects with 20 billion cubic feet a day of LNG production capacity. “Virtually all (LNG) project sanction decisions outside of the U.S. have been pushed back,” the investment bank said.

Canada and Norway topped the investment bank’s list of deferred projects by country. By comparison, few deep-water projects have been deferred in the Gulf of Mexico and Brazil, Tudor Pickering said, but the industry has shelved plans for more deep-water ventures in Angola and Nigeria, which were in trouble even before oil prices fell because of unattractive terms offered by the Angolan government and fiscal issues in Nigeria. In terms of daily production, about 6 million barrels buried in the earth’s deepest reservoirs will remain there for longer than oil companies intended.

The International Energy Agency estimates it costs $95 to $114 a barrel to pull crude from Canadian oil sands upgraded with high-tech extraction methods and $59 to $90 a barrel to produce in the U.S. shale plays. Deep-water projects cost $60 to $75 a barrel in West Africa and $38 to $65 a barrel in Brazil.

Saudi Arabia and Iraq, by contrast, can pump oil for $9 to $14 a barrel. Both OPEC countries have produced record amounts of crude this year.

All told, the industry has scrapped projects worth about $125 billion in annual capital spending plans over the next five years, assuming just half of the projects would have been sanctioned if the oil market hadn’t crashed over the last 18 months. That leaves oil companies several years behind on building the production equipment and infrastructure they eventually will need to bring their buried oil to market.

“Even when prices come back, U.S. production will certainly rebound after a period of time, but it’s the rest of non-OPEC that could be structurally impaired for a while,” Pursell said.

For the world’s biggest publicly traded oil companies, the huge scale of the delays “suggests that companies will have real growth issues toward the end of the decade,” and some will have to buy smaller rivals to make up for it, Tudor Pickering said. The handful of publicly traded international companies characterized as Big Oil account for a third of the 150 projects the investment bank says have been delayed or canceled.

BP and Chevron have deferred the largest number of projects while Exxon Mobil Corp. could delay the most oil barrels, about 2.5 million barrels a day of production capacity from 25 projects. That’s about two-thirds the amount Irving-based Exxon Mobil produces now. Royal Dutch Shell is next, deferring 1.7 million barrels of oil a day, but its deal to buy BG Group this year has alleviated many of the growth issues it might face in coming years. BG Group has a big stake in Brazil’s deep-water fields.